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Alphabet Reports Strong Q1 2025 Results Amidst AI Acceleration and First Signs of Search Market Disruption

Alphabet Reports Strong Q1 2025 Results Amidst AI Acceleration and First Signs of Search Market Disruption

David
April 27, 2025

Google-parent Alphabet kicked off 2025 with a strong first quarter, reporting consolidated revenues of $90.2 billion, an increase of 12% year-over-year (14% in constant currency). This performance reflected robust momentum across the business, with Google Search & other, YouTube ads, Google subscriptions, platforms, and devices, and Google Cloud all delivering double-digit growth rates. Operating income increased 20% to $31 billion, and the operating margin expanded to 33.9%, up 2.3 points year-over-year. Net income saw a significant rise of 46% to $34.5 billion, resulting in diluted earnings per share of $2.81, up 49% from $1.89 a year prior.

Key Performance Drivers and Segment Highlights:

Google Services: Revenues for this segment increased 10% year-over-year to $77.3 billion. This was driven by strength in Google Search and YouTube advertising and subscriptions.
- Google Search & Other advertising revenues increased 10% to $50.7 billion, led by the Financial Services vertical, primarily due to strength in Insurance, followed by Retail.
- YouTube advertising revenues increased 10% to $8.9 billion, driven by direct response, followed by brand advertising. Engaged views on YouTube Shorts grew over 20% in Q1, and monetization progress in Shorts is encouraging, particularly in the U.S. YouTube also recently celebrated its 20th anniversary. YouTube Music and Premium reached over 125 million subscribers globally, including trials.
- Subscriptions, Platforms, and Devices revenues increased 19% to $10.4 billion, reflecting strong growth in subscription revenues driven primarily by YouTube subscription offerings and Google One. Alphabet surpassed 270 million paid subscriptions across its offerings.
Google Cloud: This segment continued its strong performance, with revenue increasing 28% to $12.3 billion in the first quarter. Growth in Google Cloud Platform (GCP) was much higher than Cloud's overall revenue growth rate, driven by both Core and AI products. Google Workspace growth was primarily due to an increase in average revenue per seat [15]. Google Cloud's operating income increased significantly to $2.2 billion, with the operating margin improving from 9.4% to 17.8%.
Other Bets: Revenues were $450 million, with an operating loss of $1.2 billion, reflecting a year-over-year decline in revenue and an increase in loss primarily due to a milestone payment received in Q1 2024.
Waymo: Continued to progress, safely serving over a quarter of a million paid passenger trips each week, a five-fold increase from a year ago [12, 18]. Waymo expanded its service to Silicon Valley, further expanded in Austin through a partnership with Uber, and is preparing for public launches in Atlanta later this summer and Washington, D.C., in 2026.

AI at the Core of Growth and Innovation:

Alphabet emphasized its unique full-stack approach to AI as central to its growth. The company rolled out Gemini 2.5, described as its most intelligent AI model to date, which is widely recognized as the best model in the industry and is achieving breakthroughs in performance. Gemini 2.5 Pro, released last month, received extremely positive feedback and debuted at number one on the Chatbot Arena. It achieved significant improvements in reasoning, coding, science, and math capabilities. The company also introduced Gemini 2.5 Flash to help developers optimize quality and cost.

AI is powering new features across products. AI Overviews in Search are being used by over 1.5 billion users per month. Early reaction to AI Mode is positive, with users typing roughly twice as long queries compared to traditional Search. Circle to Search is now available on over 250 million devices, with usage increasing nearly 40% this quarter, and monthly visual searches with Lens have increased by five billion since October. Google is also infusing AI into its Ads business to enhance advertiser value and match ads to more relevant search queries [8]. In Google Workspace, AI assists deliver more than 2 billion assists monthly, including summarizing Gmail and refining Docs. AI is also being used internally for coding, customer service, and other functions.

Investments in AI infrastructure continue, including long-term investments in Google's global network (over two million miles of fiber and thirty-three subsea cables) and offering a wide range of TPUs and GPUs. Ironwood, the seventh-generation TPU, is designed specifically for inference at scale and delivers more than 10X improvement in compute power over the recent high-performance TPU while being nearly twice as power efficient. Google was also the first cloud provider to offer NVIDIA's B200 and GB200 Blackwell GPUs and plans to offer the next-generation Vera Rubin GPUs.

Capital Allocation and Outlook:

Capital expenditures (CapEx) in Q1 were $17.2 billion, primarily reflecting investment in technical infrastructure, with the largest components being servers and data centers to support growth across Google Services, Google Cloud, and Google DeepMind [15, 24]. For the full year 2025, Alphabet still expects to invest approximately $75 billion in CapEx. This significant investment over the past few years is expected to continue putting pressure on the income statement, primarily in the form of higher depreciation. In Q1, depreciation from technical infrastructure assets grew 31% year-over-year, and the growth rate is expected to accelerate throughout 2025.

Alphabet returned value to shareholders through $15.1 billion in share repurchases and $2.4 billion in dividend payments in Q1. The Board of Directors declared a 5% increase in the quarterly dividend to $0.21 per share and approved a new $70 billion share repurchase authorization.

Looking ahead, Alphabet noted a few factors impacting revenue. In Google Services advertising, the company will be lapping the strength seen in the Financial Services vertical throughout 2024. In Cloud, the company is in a tight demand/supply environment, and growth rates could vary depending on the timing of new capacity deployment, with relatively higher deployment expected towards the end of 2025. A "slight headwind" to the ads business is also expected in 2025 primarily from APAC-based retailers due to changes in the de minimis exemption (related to tariffs). While the company is not immune to the macro environment and does not provide a forward outlook beyond noting some factors, it is focused on driving efficiency and productivity to offset cost pressures and fund investments.

Valuation and Investor Sentiment:

Alphabet's share price rose following the Q1 results. Morningstar views Alphabet's stock as materially undervalued, maintaining a $237 per share fair value estimate compared to the April 24, 2025 closing price of $159.28. Morningstar's fair value estimate implies a Price/Fair Value ratio of 0.67. The stock's current adjusted price-to-forward earnings multiple of 16 is noted as being lower than its Big Tech peers and the long-term S&P 500 average of 20.

However, Wells Fargo maintains an Equal Weight rating with a $175 price target, citing significant uncertainty surrounding the upcoming format transition to conversational search. They believe this transition will likely drive headwinds to medium-term search growth and could lead to disruption.

Opportunities and Risks:

The sources highlight several potential opportunities and risks for Alphabet:

Opportunities (Upside):

Continued AI Advancement and Adoption: Better-than-expected adoption and advancement of conversational search products and widespread leveraging of AI across nearly every business could be value-accretive. Gemini is seen as potentially averting major customer/advertiser churn.
Google Cloud Growth: Continued migration of workloads to the public cloud and increased deployment and usage of AI are key growth drivers for GCP. As GCP scales, it should become a more important part of Alphabet's business from both a top-line and profitability perspective. Increased usage of Workspace applications with embedded AI tools is also expected to drive growth. Analysts project Google Cloud sales to grow 26% annually on average over the next five years.
Strong Core Business: Alphabet's core advertising business is deeply entrenched and benefits from a secular increase in digital advertising spending. YouTube provides access to the top of the marketing funnel and is expanding its reach and innovating. Google Search's dominance is supported by strong intangible assets (brand) and a potent network effect.
Efficiency Gains: Efforts to drive efficiency and productivity throughout the organization, including moderating compensation growth, managing real estate footprint, and utilizing AI internally, can help offset cost pressures and fund investments.
Shareholder Returns: Alphabet has a massive share buyback program and pays a quarterly dividend, leveraging these for shareholder distributions.

Risks (Downside):

Search Disruption: The transition to conversational search brings uncertainty to the search market. Wells Fargo notes a deceleration in Google Search & Other paid clicks growth to +2% year-over-year in Q1 (vs. +5% in 4Q), which they see as the first reported search metric showing AI competitive impact. Rising efficiency of conversational searches could drastically decrease the number of traditional search queries.
Competition: ChatGPT continues to grow rapidly, seen as a volume threat today and a revenue threat tomorrow. Competitors could bid aggressively for Google's search distribution partnerships.
Antitrust Regulation: Regulators worldwide are focusing on Google's search dominance. Ongoing antitrust cases could potentially impact Google's business through governmental or judicial intervention. While some analysts believe Google will navigate these without material value destruction, adverse rulings could force changes to distribution agreements or result in significant fines.
•Macroeconomic Environment & Tariffs: Alphabet is not immune to macro conditions [9, 34]. Changes to the de minimis exemption related to tariffs are expected to cause a slight headwind to the ads business.
Increased Costs: Significant CapEx investments lead to accelerating depreciation expenses, putting pressure on profitability. Potential for major distribution partners to significantly increase the contractual revenue share percentage in their agreements with Google.
Other Bets: Investments in new, often unproven technologies via Other Bets have been a drag on cash flows.
Data Privacy: High dependence on user behavior data presents a risk; failure to maintain adequate data privacy and security could harm the advertising business and user trust.

	2021A	2022A	2023A	2024A	2025E	2026E	2027E	2028E
Revenue ($bln)	257.6	282.8	307.4	350.0	389.1	423.2	450.8	475.8
Op. Income ($bln)	78.7	74.8	84.3	112.4	129.0	134.6	135.8	136.6
Net Income ($bln)	76.1	49.9	7.8	100.1	119.0	115.9	116.8	117.2
EPS ($)	5.61	4.56	5.80	8.04	9.76	9.70	10.00	10.20
P/E					19.8	16.3	16.4	16.2

In conclusion, Alphabet's Q1 2025 results demonstrated strong financial performance driven by growth across key segments, particularly Cloud and Search, heavily powered by AI innovation. While analysts have differing views on the stock's current valuation and the potential impact of AI-driven changes and market uncertainties, the company continues to invest heavily in its future, navigating both opportunities in AI and potential headwinds from competition, regulation, and macroeconomic factors.